The Co-operative Group has agreed terms to buy 632 bank branches from Lloyds Banking Group.

Co-op will pay Lloyds £350 million, with a further £400 million to be paid based on performance of the branches being sold under the Project Verde agreement.

The deal represents a steep discount on the £1.5 billion reported bid for the branches by NBNK Investments.

NBNK, a new banking vehicle set up by former Lloyds of London chairman Lord Levene, was until recently the only serious rival bidder until the Co-op bid.

However, NBNK dropped its bid for the Project Verde branches earlier in the year.

Peter Marks, Co-op's chief executive, said the business it was buying from Lloyds had “changed significantly” in the past 12 months, and the deal on offer represents “a very fair price”.

The deal, which remains subject to FSA approval, is expected to be waived through by November, 2013.

Lloyds group chief executive Antonio Horta-Osorio said: "In agreeing to move ahead with the Co-operative we provide greater certainty for our customers and for our shareholders.

"In addition to an upfront consideration, we will also get to share in the future financial performance of the combined banking business which will be an effective challenger with a strong customer focus."

Lloyds is being forced to sell the branches by the EU in return for taxpayer-backed bailouts.

The EU has demanded the sale of the branches – which represents six per cent UK market share - is concluded by November 2013.

When the deal concludes, the Co-op's branch network will swell to nearly 1,000, representing nearly seven per cent of the UK retail banking market.

Co-op currently has around two per cent of the UK current account market with 345 branches managing £45 billion in assets.

The Independent Commission on Banking has previously stated a six per cent share in retail banking is the minimum required to create an effective competitor for the UK market.

Last month Lloyds announced it had come to an “understanding” with the Co-op on the deal, which will see 4.8 million Lloyds customers transfer over to Co-op.

The Project Verde branches will be rebranded to TSB by the summer of 2012, and will transfer over to the Co-op under than brand name.

Lloyds chose the Co-op as its preferred bidder in December, though the sale has been subject to lengthy delays due to the slow pace of negotiations with regulators.

Some of the regulatory uncertainty surrounding the Co-op offer has reportedly now been addressed.

The concessions are believed to include plans for a Lloyds management team to transfer with the Verde business to run the Co-op's enlarged banking arm.

Lloyds is also said to be providing the systems and technology platforms needed to run a banking operation which would be three times the size of Co-op's current retail banking division.

And because the Co-op's financial services arm would dwarf the rest of its business as a result of the deal, the whole of the Co-op will have to be regulated as a financial institution.

Lloyds, which remains more than 40 per cent taxpayer-owned, ended an exclusivity agreement with the Co-op in April, which allowed other bidders to come forward.

Co-op's only rival in the deal, NBNK, had tabled a bid based on floating the Verde branches on the stock exchange to meet a £10 billion funding gap based on NBNK taking assets valued at £45 billion on £35 billion of deposits.

The Co-op had tailored its bid for the branches to reduce the number of mortgage accounts being sold within the divestment package to reduce a funding gap on its deposits and around £30 billion in loans being sold by Lloyds.

Co-op had insisted on a funding gap of no more than £5 billion between assets and deposits.

Most of the assets Co-op has asked to be removed from the sale are linked to mortgages.

Co-op chief, Peter Marks, said the deal with Lloyds was good news for the wider UK banking industry.

He said: “What the banking industry needs is to bring back trust. We've seen over the last few years, and particularly over the last few weeks, trust has deteriorated in big banks.

"This represents a major change to the face of retail banking in the UK.”